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The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We'll show how you can use Alicon Castalloy Limited's (NSE:ALICON) P/E ratio to inform your assessment of the investment opportunity. Based on the last twelve months, Alicon Castalloy's P/E ratio is 14.98. That means that at current prices, buyers pay ₹14.98 for every ₹1 in trailing yearly profits.

See our latest analysis for Alicon Castalloy

How Do I Calculate A Price To Earnings Ratio?

The formula for price to earnings is:

Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)

Or for Alicon Castalloy:

P/E of 14.98 = ₹588.75 ÷ ₹39.31 (Based on the trailing twelve months to March 2019.)

Is A High Price-to-Earnings Ratio Good?

A higher P/E ratio means that investors are paying a higher price for each ₹1 of company earnings. All else being equal, it's better to pay a low price -- but as Warren Buffett said, 'It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.'

How Growth Rates Impact P/E Ratios

Generally speaking the rate of earnings growth has a profound impact on a company's P/E multiple. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. That means even if the current P/E is high, it will reduce over time if the share price stays flat. Then, a lower P/E should attract more buyers, pushing the share price up.

Notably, Alicon Castalloy grew EPS by a whopping 33% in the last year. And it has bolstered its earnings per share by 18% per year over the last five years. So we'd generally expect it to have a relatively high P/E ratio.

How Does Alicon Castalloy's P/E Ratio Compare To Its Peers?

The P/E ratio essentially measures market expectations of a company. The image below shows that Alicon Castalloy has a P/E ratio that is roughly in line with the auto components industry average (15).

Alicon Castalloy's P/E tells us that market participants think its prospects are roughly in line with its industry. The company could surprise by performing better than average, in the future. Checking factors such as the tenure of the board and management could help you form your own view on if that will happen.

Remember: P/E Ratios Don't Consider The Balance Sheet

Don't forget that the P/E ratio considers market capitalization. So it won't reflect the advantage of cash, or disadvantage of debt. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on growth.